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Impact of Global Sell-Off on Shell-BG Group Deal

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Screen Shot 2015-08-25 at 13.53.52By: MICHEAL KAUFMANAug 25, 2015

Royal Dutch Shell plc. (ADR) (NYSE:RDS.A) earlier this year finalized its $70 billion merger deal with BG Group plc. (ADR) (NYSE:BRGYY). The cash-and-stock deal valued BG at $20 per share. Shell, based on BG’s stock price on April 7, agreed on paying a 50% premium. However, as yesterday’s sell-off and grim crude oil prices are factored into the mix, it appears that the deal, among many others, may fall apart.

BG stock slipped 6.78% to close Monday’s trading session at $14.71 per share. The spread for the deal reached its highest level on Monday. Shell looks forward to acquiring BG’s Liquefied Natural Gas (LNG) assets. The company is also interested in the acquisition so as to take advantage of the opportunity to enter new markets.

While the deal can provide substantial cost-saving advantages to both the entities, it needs to be seen whether the deal is sustainable at current low crude levels. Many analysts have expressed concerns that Shell is paying a massive premium for the deal. They argue that Shell needed oil prices at $90 per barrel to survive. The Chief Financial Officer of Shell has countered the argument that the deal was able to survive at $70 per barrel.

Crude, however, is now trading in the high 30s. That the commodity’s price would reach even $70 per barrel seems an unattainable target for now. Furthermore, the Shell-BG deal awaits regulatory approval. Shell has indicated that it intends to undertake $30 billion of asset divestitures between 2016 and 2018.

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